First Financial Holdings priced a debut GDR after Taiwan's close on Wednesday, raising $515 million from the sale of 50 million units at $10.30 a piece. This represented a 12.3% discount to the stock's NT$20.2 close in Taiwan, the upper end of a pre-marketed range between NT$17.50 and NT$17.75.
In the end, all involved appeared able to salvage some measure of their reputation and co-opt statistics, which would best justify their view of one of the more controversial deals of the year. For First Financial, the transaction is likely to be viewed as a great achievement, since it has once more successfully pioneered banking sector reform in Taiwan and raised enough funds to re-capitalize its balance sheet. As such the Taiwanese government is also likely to be extremely satisfied that the stage has now been set for further offerings from a sector, which desperately needs to raise new funds.
For sole bookrunner Deutsche Bank, the offering will also be seen as a great success since the bank has been able to execute pricing at the aggressive end of the discount range it had promised the client and appears to have done so without having to eat a lot of the paper itself. Executing such a large deal on its own, with virtually no syndicate and after a large stream of deals from Taiwan, is no small feat.
And yet for Citigroup, which had led the deal until only two weeks, final pricing also underlines its judgement call that the stock needed to come at an NT$ level in the mid to high teens (a 20% to 30% discount to trading levels two weeks ago).
As a result of the transaction, First Financial has sold one billion primary shares at NT$17.72 and enlarged its share capital by 18%. There is no greenshoe and a ratio of 20 shares per GDR unit.
Pricing was undoubtedly helped by three factors. Firstly, news broke in the Taiwanese two days after pricing that Yuanta Securities purchased $200 million of the transaction following merger talks between Yuanta and First FInancial. Neither was disclosed in the prospectus, but such a large another order inevitably made the lead manager's job considerably easier.
Secondly, as expected the share price drifted lower over the course of the marketing period. Having traded up from an NT$22 level prior to pre-marketing, it hit a recent high of just over NT$24 around July 8 and has come down roughly 16% over the past couple of weeks. Many now believe it is at a level where accounts feel it starts to have some value relative to its domestic peers.
And thirdly, the Taiwanese government changed the regulations governing GDRs last week, in the process providing Deutsche with what many view as a "get out of jail free" card. Where previously primary GDRs were only fungible with local stock after three months, they are now fungible immediately and therefore a much more attractive proposition for hedge funds. A number of market players believe the regulations were changed purely to aid the completion of First Financial's deal at an acceptable headline discount.
However, there has been confusion over the interpretation of this legislation, with some law firms stating that GDRs should still not be fungible for a period of anything ranging from seven to 30 days because of the practicalities of settlement and share certificate issuance.
But as one observer puts it, "First Financial has been the test case and it's been ruled that the company and its underwriters should decide when a deal becomes fungible. They could choose to maintain a 90 day block if they like, but we're going with immediate fungibility."
Deutsche Bank further argues that fungibility is a side issue anyway. Frank Nash, the bank's head of global corporate finance for Asia Pacific says, "We could have done this deal without fungibility, with a minimal impact on price."
Officials say the book closed 7am London time about twice covered with a high degree of sensitivity around a discount level of 12%. Declining to give a detailed breakdown, officials do say that half the deal was placed in Asia and the balance predominantly in Europe.
In the absence of a proper breakdown, others have been left to speculate that a high proportion of investors were hedge funds. This would appear to be supported by reports that the lead sold 34 million shares in the run up to the deal in order to set up short positions for its clients.
On a positive note, most believe the deal was fully sold and not left on the lead's books. Nash also reiterates a lack of promises to backstop the deal.
"This was a fully marketed transaction with no hard or soft underwriting commitments on our part," he adds. "We told the company where we thought we could get the deal done, they believed us and we have now achieved those levels for them."
On a price to book basis, Deutsche Bank research estimates that post deal, First Financial is valued at 1.19 times 2003 book. This valuation takes into account: an NT$20 billion increase in provisioning; the consolidation of three non-bank subsidiaries into the holding company (Mingtai, NITC and Taisec); plus 2003 earnings estimates.
At this level, it is somewhat cheaper than comparables such as partially government-owned Hua Nan, which is currently trading around two times book and Fubon Financial Holdings, around 1.44 times.
The sale sees the government's stake in the group fall from 36% pre consolidation of subsidiaries to 30.1% post consolidation and 24.8% post GDR. At the same time, First Financial will see its pro forma consolidated Capital Adequacy Ratio lifted from 10.56% to 12.3% of which 8.5% constitutes tier 1 equity and 3.8% tier 2 debt.
As part of the capital raising, the bank has also taken an NT$20 billion charge against its NPLs, which will lift its coverage ratio from an extremely poorly 14% to 54.3%. This will make it one, if not the best, provisioned commercial bank in Taiwan, with Chinatrust coming in second on 52.4% (as of December 2002).
After an Ernst & Young review using IAS 39 standards, NPLs are said to stand at 6.8% up from 5.8% on a six-month past due basis. Convincing investors that NPLs will continue to trend downwards was one of the most important challenges faced during roadshows.
"First Financial management were very candid and thorough," Nash states. "They recognise they have an NPL problem and it was important to show investors how seriously they've thought it all through and what steps they've taken to tackle it. They also needed to convince investors that this is a transaction which will fix their balance sheet."
Investors appear to have given First Financial the benefit of the doubt, which is somewhat surprising given the sorry history of Asian bank re-capitalizations in the aftermath of the financial crisis. However, whereas the Thai banks were never very pro-active in dealing with their problems, First Financial has shown willingness to take the initiative on a number of occasions.
It established the NPL auction process in Taiwan and during 2002 sold off NT$74 billion ($2.1 billion) NPLs. During 2003, it says it intends to dispose of a further NT$55 billion ($1.6 billion).
Analysts now believe the GDR and an NT$4.2 billion tier 2 subordinated debt issue will adequately re-capitalise the bank and give it a platform to re-engineer its business away from commercial lending into retail and wealth management.
